The one surviving bear had a fantastic week – granted 3 of his 4 limbs have been severed so fantastic is relative. You will have heard a lot of clucking about “reasons” for the selloff this past week. These are just random prose to explain a very overheated market that was long overdue for a correction of any sort. The major indexes were on pace for 70-80-90% gains based on the first 3 weeks of the year…. that’s not sustainable. We’ve been setting all sorts of records of days/weeks/months without a pullback of any sort. So here is a pullback. The words needed to explain it are just excess.
Pullbacks for months on end have been incredibly minor – finding even a day of >0.30% down was difficult to find. This week three different days actually surpassed <0.5% down. Which again is a pretty normal number, that this market has been unable to accomplish much at all for a year. Now the only question is can we get a more serious correction or was this the one week down before the Trump market turns around and takes the last remaining limb of the last bear?
By the way January 2018 ended as the best monthly returns since March 2016 (PANIC!) The S&P 500 gained 5.6% for the month – that includes the losses of Monday and Tuesday. That would annualize to 67.2%. The NASDAQ rose 7.4% for the month; that’s a cool 88.8% return annualized. So again even with the selling Monday and Tuesday, indexes were on pace for 70-90% returns.
For the week the S&P 500 fell 3.9% and NASDAQ 2.5%.
“This feels like a correction. Markets had been really overextended and right now is a perfect time for a pullback,” said Joe Saluzzi, partner, co-head of Equity Trading at Themis Trading. “People had been waiting for long-dated yields to rise and they are finally rising. There is nothing unexpected about it, but the market is letting some of the steam out after a big rally,” Saluzzi said.
Clucking heads on financial TV and written media will point to the rise in Treasury rates – as if everyone is going to abandon the 25% a year up forever market to run to get a 2.8% return in bonds. Or “inflation” – that is nearly non existent. Again – this is a convenient “reason” for a selloff. Something had to be the catalyst or else the 24 news cycle won’t have much to talk about.
The Federal Reserve met and released a statement Wednesday – as expected; nothing major.
The Fed said it expects inflation “to move up this year” in a sign it’s likely to hike rates at its next meeting in March. Inflation is likely to stabilize around its 2% target, said the central bank, dropping prior language about a recent decline in prices. In another notable change, the Fed said “market-based measures of inflation compensation have increased in recent months.” However, the Fed left its benchmark short-term rate at a range of 1.25% to 1.50%. The January meeting is the last for outgoing Chairwoman Janet Yellen who will be replaced by fellow board member Jerome Powell on Feb. 3.
In economic news, Monday it was reported consumer spending climbed 0.4% in December, capping off the biggest increase in household buying since 2011. The employment data hit Friday and hand wringers focused on wage growth which has been extremely stagnant for a decade.
The U.S. created 200,000 new jobs in the first month of 2018, showing that companies are still hungry to hire more than eight years after an economic expansion began. Even better, worker pay also rose at the fastest yearly pace since 2009. Unemployment remained at a 17-year low of 4.1%. Average hourly wages jumped 9 cents, or 0.3%, to $26.74. That pushed the yearly increase to 2.9% from 2.6%. Some 18 states raised minimum wages in January and that likely added to the increase in pay.
The bitcoin is back below $9K.
Here is the 5 day weekly “intraday” chart of the S&P 500 …via Jill Mislinski.
This will be interesting to see if it gets any traction as details are sparse – Amazon, Berkshire, and JPMorgan are partnering to find a way to cut healthcare costs. I’d normally be very cynical about this but if Buffet is involved there may be a 1% chance this is not just a get rich scheme by the companies.
The giant companies, which together employ more than 1.1 million workers, will launch an independent operation that’s intended to be free from profit-making incentives.
“The ballooning costs of healthcare act as a hungry tapeworm on the American economy,” Berkshire CEO Warren Buffett said in a statement. “Our group does not come to this problem with answers. But we also do not accept it as inevitable. Rather, we share the belief that putting our collective resources behind the country’s best talent can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes.”
The week ahead…
As stated above – what happens next? The market is EXTREMELY oversold short term; first time I’ve written that in a very long time so we should expect a cursory bounce. What happens after that will be the interesting part. Aside from that earnings will continue although a lot of the heavy hitters are now out of the way.
Short term: Indexes broke their 20 day moving averages. Any other year that would be a normal week in the month. In this market it’s “momentous”.
The Russell 2000 has been the weakest of the averages for a while, and remains so – actually puncturing that 50 day moving average slightly. It also broke through a trend line set by highs of December 2017.
Haven’t been able to say this since March 2017: the NYSE McClellan Oscillator is at EXTREME oversold levels so a snap back rally – even if for a day or two – is likely.
Long term: Last week we wrote “parabolic” on the weekly chart. This week – it’s still parabolic. This “selloff” still has the NASDAQ above it’s long term channel by a good amount. A lot more work needed to return to any sort of normalcy.
Charts of interest / Big Movers:
Monday, Dr Pepper Snapple Group (DPS) soared 22% after a merger deal with Keurig Green Mountain was announced early Monday.
Tuesday, Harley Davidson (HOG) tumbled 8% after the motorcycle maker posted a sales drop. The rest of the week was not too great either.
Apple is almost down to its 200 day moving average. Earnings were fine, they low balled forecasts as they always do.
Thursday, Qorvo (QRVO) ended up more than 16% after it reported quarterly revenue that was better than expected. The company, an Apple supplier, was created by the merger of TriQuint Semiconductor and RF Micro Devices.
Facebook (FB) climbed 3.3% after the social media giant late Wednesday reported double-digit advertising price growth. Amazing pricing power. What correction?
Chief Financial Officer David Wehner, in prepared remarks on a post-earnings conference call, said that the average price per Facebook ad increased by 43% as the total number of impressions — pages loaded with ads served by Facebook — gained 4% last quarter. The majority of the pricing increase is due to Facebook’s core app as well as Instagram, for which it does not break out financial results.
Have a great week and we’ll see you back here Sunday!